Home Depot Stock Could Be Nearing the End of Its Long-Term Rally

Despite a promising start to the first quarter, Dow component The Home Depot, Inc. (HD) is facing significant selling pressure following its recent fourth-quarter earnings announcement. Over the past month, the stock has been hovering around its 200-day exponential moving average (EMA) support level, with the risk of a breakdown that could send it tumbling toward the 2018 52-week low in the $150 range. This movement may mark the conclusion of a long-term peak, potentially ending the company’s multi-year bull market.

On Tuesday, Home Depot exceeded profit forecasts by nine cents and reported revenue in line with expectations. However, the company’s cautious full-year earnings outlook triggered a sell-the-news reaction, as investors grew concerned that a slowdown in home sales could hinder future growth. Even strong performance metrics from competitor Lowe's Companies, Inc. (LOW) failed to alleviate these worries, leading to a 2% drop in Home Depot shares and revisiting recent weekly lows.

HD Long-Term Performance Overview (1985 – 2019)

Home Depot's stock began its upward trajectory at 23 cents in 1985, initiating a powerful bull run that included six stock splits by 1992 when the price reached $11.45. The stock consolidated for over four years before launching another rally, resulting in three more splits and peaking at $69.75 on the last trading day of 1999. This peak remained the highest point for 13 years, followed by a prolonged downturn triggered by the 2000 internet bubble burst.

By February 2003, selling pressure had driven the stock down to a five-year low near $20, which then sparked a rebound that stalled in the mid-$40s in 2004. A head and shoulders breakdown in 2007 ushered in a downtrend that intensified during the 2008 financial crisis. The stock hit an 11-year low during the October crash and confirmed a double bottom reversal in March 2009, leading to modest gains through 2010.

Renewed buying interest in 2012 propelled the stock back to its 1999 highs, followed by a breakout in 2014 that delivered strong returns until reaching $208 in January 2018. A pullback to $170 attracted buyers, resulting in a rally that briefly surpassed the previous peak by six points in September before a downturn invalidated the breakout. The stock fell below key support levels in December, hitting a 15-month low, then rebounded into the $190s in the first quarter of this year.

The monthly stochastic oscillator recently entered a buy cycle after failing to breach oversold territory. However, its two-wave decline raises caution about the recent rally, as complex indicators often move in three waves. A sustained move above the weekly high of $193.42 would alleviate these concerns and push the indicator toward a neutral midpoint.

HD Short-Term Technical Analysis (2015 – 2019)

The 2018 price drop breached the 200-day EMA in October, with subsequent bounces in November and January failing to overcome new resistance levels. While February saw a successful rebound, momentum waned, leading to a month-long test of support. Currently, the stock trades near this moving average, where a bounce could trigger a short-term buy signal, but a breakdown might signal an intermediate sell.

Meanwhile, the on-balance volume (OBV) indicator has fallen to an 18-month low despite the stock trading mid-range within its multi-year channel. This bearish divergence suggests significant institutional selling, particularly within the cyclical housing sector. With OBV now below December’s lows, the stock faces increased risk of a swift decline toward those price levels.

A further drop to the lower red trendline would complete a bearish head and shoulders pattern, even if the current recovery does not form a right shoulder near the upper red line. This pattern is concerning, as the previous decade's uptrend ended similarly in 2007. Nonetheless, there is no immediate rush to exit positions, given the stock remains approximately 30 points above the neckline.

Summary

Home Depot’s stock appears to be forming the concluding stages of a long-term topping pattern that could signal the end of its decade-long upward trend.

Disclosure: The author held no positions in the securities mentioned at the time of publication.

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